Listed property: Prospects for 2013

Listed property is unlikely to give the same stellar returns it has given in previous years in 2013, warn analysts.

2012 has been a stellar year for the listed property sector recording returns in excess of 24% for the year to date. It also outperformed the other asset classes on the JSE. Chief investment officer at Grindrod Asset Management, Ian Anderson, however says while listed property will remain a viable investment option in 2013, it is unlikely to sustain returns of 20% plus in future, given the current low initial yield.

Anderson says given that interest rates are likely to remain low for longer, at least for the next two to three years, property fundamentals are likely to improve modestly on the back of limited new supply. Asset management activities within the individual listed property companies will deliver additional shareholder value through higher income growth.

Based on this, listed property is likely to deliver returns of between 12 and 15% per annum over the next three to five years. “This return is made up of the 7% initial yield and 5 to 8% capital growth, which is a function of the income growth expected from the sector,” Anderson says. He adds: “These returns should comfortably outstrip inflation, as well as the returns from bonds and cash and may even exceed the returns from the equity market.”

Anton de Goede of Coronation Fund Managers says the listed property sector has delivered a total return of 32% for the year to date: “In addition the market capitalisation of the sector is approaching R200bn as international investors increasingly show interest in anticipation of the introduction of formal REIT (Real Estate Investment Trust) legislation within the next six months.”

The Reit legislation will rebrand property loan stock companies and property unit trusts so that they will be recognised as Reit companies under the Tax Act. This means these entities will be exempt from capital gains tax.

De Goede says as a mainly income yielding asset class, listed property tends to track long bond yields and has therefore benefited from the continual decrease in local bond yields experienced this past year.

Key trends from the listed property market

De Goede says listed property companies continue to recycle capital into new assets: “What is evident is the increase in appetite for speculative developments through land banking (buying and holding raw land until it is profitable to develop), while existing projects in the ground are mostly industrial (logistics and distribution linked within industrial park-like environments) and office (in the vicinity of Gautrain stations) driven.”

De Goede says the capital investment of some of the more recent listings within the sector also continues and goes hand in hand with equity issuances. Rural, township and commuter retail remain firmly on the radar screen with yields of around 8%.

He adds that larger property funds are cleaning up their portfolios leading to some churn within the sector. Redefine Properties recently announced that it plans to substantially reduce its government portfolio with a view to exiting it.

De Goede says another trend that has emerged is that many companies are looking to gain a foothold in the African continent. Both Redefine and Resilient earlier this year stated they were looking north, citing bureaucracy and red tape as among the reasons why.

With regard to vacancies in the office space De Goede said key trends that had emerged from recent results announcements were similar to those experienced in the earlier part of the year. These included stabilising and improving vacancies with rental reversions on existing tenants and total occupancy costs remaining a key driver of what was tolerable for tenants.

Landlords had to accept rental cuts to retain tenants in all three sub-sectors of office, industrial and retail. “While A-grade office vacancies continue to improve, B-grade vacancies are stabilising, but demand for this space remains weak,” De Goede said.

In terms of retail De Goede said there was little scope for further value to be extracted from filling up strong retail centres while large capital spend was necessary to reposition weaker centres for tenanting. However, operating cost ratios were stabilising and in some instances improving with an increased focus on electricity and water efficiencies.

Prospects going forward

De Goede says within the direct property market there seems to be a gradual return of positive momentum: “We believe this should start to reflect in positive distribution growth momentum over the next 12 to 18 months, especially since funding costs are being fixed at historically low levels.”

Anderson also noted that the listed property sector continued its recovery last week and was up 5.3% for the month by November 26: “The sector gained 1.3% last week, comprising a 0.6% increase in prices and a further 0.7% from income received by investors after both Fountainhead Property Trust and Redefine Properties went ex-dividend on 19 November,” Anderson said.

De Goede pointed out that the sector continues to be closely tied to the bond market and therefore to the potential of another ratings downgrade of the country in the coming months due to negative domestic macroeconomic pressure building.

He added a wild card remained the potential of another interest rate cut by the Reserve Bank. “As we are close to the bottom of the interest rate cycle, we caution investors to expect more muted returns from listed property going forward compared to what was achieved historically,” De Goede concluded.


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